Plan sponsors and plan participants are falling down on the job with regard to using 401(k) plans to their fullest potential, and they’re desperate for help.
In a recent survey commissioned by Schwab Retirement Plan Services, 59% of plan participants say their 401(k) is their only or largest source of retirement savings, yet 29% have either decreased or not made any changes to their 401(k) savings rate in the last two years. Just 58% know how much they should save for a comfortable retirement. Two-thirds wish to receive personalized investment advice for their 401(k), but only 12% do.
According to the 2015 “Plan Sponsor Survey” conducted by the LIMRA Secure Retirement Institute, 92% of employers have discussed retirement readiness with their advisors and plan providers, yet nearly four in 10 employers say less than half their employees are well prepared for retirement.
Of course, there’s a difference between discussing retirement readiness and actually doing something about it. And plan sponsors are often slow to adopt ideas. But advisors and other industry experts who’ve persuaded clients to implement their suggestions are seeing noticeable results. Their strategies—which address enrollment, employee education, investment selection and other factors—frequently aim to keep things simpler.
“What prevents 90% of people from participating [in 401(k) plans] isn’t laziness but confusion about the process,” says Andrew DeGroat, a principal with WhartonHill Advisors, an independent consulting and investment advisory firm headquartered in Fort Washington, Pa. “People know that saving money is good, but they’re intimidated.”
Eight to 10 years ago, DeGroat and his colleagues at WhartonHill Advisors, which today provides advisory services to 166 401(k) plans, thought the average investor was becoming more financially educated and would benefit from a greater number of 401(k) investment options. Not so anymore. “We’ve come full circle,” he says. “Less is more.”
On average, the firm’s clients now offer 16 investment options in their plans, plus a money market/stable value fund and risk-based or target-date models. Participation rates for existing non-highly compensated employees have risen as menu options have been streamlined, he says. People are also more focused on how much they should be saving, he says, rather than on sorting out the investment menu.
“We see many new clients that have three world stock funds, plus a foreign large blend, foreign large value, foreign small/mid value,” he says. “Too many redundant, obscure asset classes that confuse people.” To further reduce confusion, he suggests plans offer either risk-based or target-based models, but not both. His personal preference is to offer the former because new participants tend to better understand the risk profile they are assuming when they invest in a risk-based fund, he says.
Instead of annual education meetings, which can be intimidating, WhartonHill Advisors now suggests “drip education”—sending frequent e-mails and quarterly direct mail pieces to employees. After receiving several communications, they generally participate, says DeGroat.
“I’m a huge proponent of auto-enrollment,” he adds. Clients who’ve adopted this feature for newly eligible employees have had just 10% opt out of their plans. “Based on the 63 plans we have implemented auto-enrollment for in the past 24 months, plan participation is 76%, as opposed to 70% in the 12 months prior,” he adds.